Daily Journal Corporation (DJCO) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2023; comparisons are to the periods ended June 30, 2022. The filing was signed August 14, 2023. The company operates a Traditional newspaper and public-notice business and Journal Technologies, a justice-sector software business.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $17.704 million, up 38% from $12.817 million | $46.159 million, up 30% from $35.502 million |
| Operating income (loss) | $2.313 million vs. loss of $2.103 million | $3.222 million vs. loss of $1.674 million |
| Net income (loss) | $0.677 million ($0.49/share) vs. loss of $9.862 million (-$7.15/share) | $27.937 million ($20.29/share) vs. loss of $30.797 million (-$22.31/share) |
| Operating margin | 13.1% vs. negative 16.4% | 7.0% vs. negative 4.7% |
| Operating cash flow | Not reported separately for the quarter | $8.424 million provided, vs. $9.865 million used |
For the nine-month period, Journal Technologies revenue grew 44% to $34.152 million and segment operating income was $0.910 million, versus an operating loss of $3.116 million. It accounted for approximately 74% of company revenue, compared with 67% a year earlier. Traditional Business revenue was nearly flat at $12.007 million; segment operating income was $2.312 million.
Nine-month net income was strongly affected by the investment portfolio: the company recorded $29.934 million of net unrealized gains on marketable securities, versus $57.075 million of unrealized losses in the prior-year period. Dividends and interest income were $7.119 million; interest expense on margin loans and other items was $3.085 million. The quarter included $2.735 million of unrealized investment losses. Thus, reported earnings do not solely reflect operating performance.
At June 30, cash and cash equivalents were $20.434 million, restricted cash $2.083 million, and marketable securities $316.038 million. Working capital was $317.925 million, including $26.944 million of deferred subscription, consulting and maintenance liabilities. Shareholders’ equity was $206.954 million. The portfolio had a $165.412 million adjusted cost basis and $150.626 million of pretax unrealized gains; most gains were concentrated in stocks of three U.S. financial institutions and one foreign manufacturer.
Investment margin borrowings were $81 million, collateralized by marketable securities, with a floating rate of 5.75% at June 30 and no stated maturity. The real-estate loan balance was approximately $1.32 million, at a fixed 3.33% rate. The filing cautions that borrowing capacity varies with portfolio value and significant declines could trigger margin calls. Cash, restricted cash and cash equivalents rose $7.049 million over the nine months.
Material changes and management commentary
- Journal Technologies’ revenue increase reflected higher consulting fees, licensing and maintenance fees, and public-service fees. Management attributed the consulting increase mainly to more project go-lives. Deferred consulting fees generally represent customer advances recognized at project go-live.
- Consolidated nine-month operating expenses rose 15% to $42.937 million. Salaries and benefits increased 14%, primarily from compensation-market adjustments and additional hires; outside services rose 68%, including contractor and third-party hosting costs.
- Traditional Business public-notice revenue benefited from more trustee-sale notices following the lifting of COVID-related foreclosure moratoriums. Published foreclosure notices increased 31% year over year for the nine-month period. Management expects the broader newspaper-industry decline and work-from-home effects on subscriptions to continue.
- Management says it expects to fund operations for the foreseeable future from operating cash flows and working capital. No specific revenue, earnings or other numerical guidance is provided. It also says Journal Technologies aims to become a significant software company while retaining the Traditional Business.
Risks, contingencies and unusual items
- Management reported that disclosure controls and procedures were not effective as of June 30, 2023, in light of material weaknesses previously described in the fiscal 2022 Form 10-K. No material changes in internal control over financial reporting were reported during the quarter.
- Risks identified include software development and implementation execution, delayed or cancelled government procurement or projects, go-live timing, cybersecurity, newspaper-industry decline, changes to public-notice laws or newspaper adjudication status, paper and postage costs, and declines in portfolio securities. The filing notes that implementation delays can defer revenue and could expose projects to cancellation.
- The $81 million margin balance is variable-rate and securities-backed; falling collateral values could constrain borrowing or result in margin calls. The portfolio’s concentrated unrealized gains and related deferred taxes also create exposure to market movements and potential tax on sale.
- Management does not believe pending ordinary-course contingencies, including litigation, will materially adversely affect financial position, results or cash flows. The company expects the new credit-loss accounting standard, effective in fiscal 2024, to have no material effect.
- The company recorded a $9.640 million income-tax provision for the nine months, including $7.950 million related to unrealized investment gains; its reported effective tax rate was 25.7%.
Important facts for investors to verify
- How much of future earnings and equity changes depend on unrealized portfolio gains, and how the concentrated holdings perform.
- Margin-loan terms, current borrowing availability, collateral requirements and potential margin-call exposure.
- Journal Technologies’ project pipeline, go-live timing, deferred consulting fees, recurring maintenance revenue and ability to convert growth into durable operating profit.
- Management’s remediation plan and progress addressing the disclosed material weaknesses in internal controls.
- Whether newspaper subscription and advertising declines, public-notice requirements and foreclosure-related notice volumes materially change.